Euro Down as ECB Survey Shows Falling Inflation Expectations, Aussie Staying Strong

Euro plummets broadly in today’s market after a CB survey revealed significant drop in consumer inflation expectations. Sterling and Swiss Franc also recorded a generalized weakness. On the other hand, Australian Dollar held its ground as the day’s strongest currency, buoyed by an unexpected interest rate hike by RBA. The Canadian Dollar followed closely, though traders remain vigilant for any surprises from BoC due tomorrow. Amidst these developments, Dollar is making modest gains, aided by a rally in treasury yields, while Japanese Yen showed slight weakness.

From a technical perspective, the main focus continues to be on the potential breakout of Dollar from its narrow range against European majors and Yen. Key levels to watch include 1.0634 support in EUR/USD, 1.2306 support in GBP/USD, 0.9146 resistance in USD/CHF, and 140.90 resistance in USD/JPY. Firm break of any of these levels could signal an early comeback for the greenback.

In Europe, at the time of writing, FTSE is down -0.03%. DAX is down -0.04%. CAC is down -0.11%. Germany 10-year yield is down -0.0198 at 2.362. Earlier in Asia, Nikkei rose another 0.90%. Hong Kong HSI dropped -0.05%. China Shanghai SSE dropped -1.15%. Singapore Strait Times rose 0.03%. Japan 10-year JGB yield dropped -0.0107 to 0.423.

ECB Survey: Inflation expectations dropped significantly

According to the latest Consumer Expectations Survey conducted by ECB in April, consumer inflation expectations have taken a significant downturn, reversing most of the gains made in the previous month.

The survey revealed that mean inflation expectations for the coming 12 months dropped from 6.3% to 5.3%. Median inflation expectations for the same period also saw a decline, dropping from 5.0% to 4.1%. These results mark a decrease even below February readings, which were at 5.8% and 4.6% respectively.

Looking further ahead, mean inflation expectations for three years in the future also slid down from 4.3% to 3.8%. Similarly, median expectations for this timeline dropped from 2.9% to 2.5%.

However, consumer sentiment regarding economic growth over the next 12 months displayed less negativity. The mean expectations for economic growth in the next year edged up from -1.0% to -0.8%. Meanwhile, median growth expectations remained static at 0.0% for the next 12 months.

Eurozone retail sales flat in April, EU up 0.1% mom

Eurozone retail sales was unchanged for the month in April, below expectation of 0.2% mom. Volume of retail trade increased by 0.5% mom for non-food products, while it decreased by -0.5% mom for food, drinks and tobacco and by -2.3% mom for automotive fuels.

EU retail sales rose 0.1% mom. Among Member States for which data are available, the highest monthly increases in the total retail trade volume were registered in the Croatia (+3.4%), Luxembourg (+3.3%) and Sweden (+3.1%). The largest decreases were observed in Slovakia (-5.8%), Romania (-3.7%) and Slovenia (-2.4%).

UK PMI construction rose to 51.6, mixed picture

UK PMI Construction rose from 51.1 to 51.6 in May, above expectation of 50.9. S&P Global noted that total activity increased at the fastest pace for three months. Growth was driven by commercial and civil engineering activity. House building, however, fell at the steepest rate since May 2020.

Tim Moore, Economics Director at S&P Global Market Intelligence, said: “May data highlighted a mixed picture across the UK construction sector as solid growth rates in commercial and civil engineering activity contrasted with a steeper downturn in house building….

“Inflationary pressures meanwhile eased considerably May, with purchase prices increasing to the smallest extent since September 2020. Supply chain normalisation helped to moderate cost inflation, as signalled by the strongest improvement in delivery times for construction products and materials for almost 14 years.”

RBA surprises with 25bps hike, to give itself greater confidence

RBA surprises the market by raising the cash rate target rate, by 25bps to 4.10. Tightening bias is maintained as “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”.

The central bank noted that while inflation is “still too high” even though it has “passed its peak.” Also, it will be “some time yet” before inflation falls back to target range. It explained, “this further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe”.

Growth “has slowed” and labor market conditions “remain very tight” even though eased. Wages growth “has picked up” but is “still consistent with the inflation target”. The path to soft landing “remains a narrow one” and a “significant source” of uncertainty continues to be household consumption.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0684; (P) 1.0703; (R1) 1.0731; More…

EUR/USD dips mildly after rejection by 55 4H EMA but stays above 1.0634 support. Intraday bias remains neutral and more consolidations could still be seen. On the downside, break of 1.0634 will resume the corrective decline from 1.1094. Deeper fall should then be seen to 1.0515 cluster support, 38.2% retracement of 0.9534 to 1.1094 at 1.0498. On the upside, however, above 1.0778 will resume the rebound from 1.0634 to 55 D EMA (now at 1.0829).

In the bigger picture, as long as 1.0515 support holds, rise from 0.9534 (2022 low) would still extend higher. Sustained break of 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 will solidify the case of bullish trend reversal and target 1.2348 resistance next (2021 high).

Economic Indicators Update